The brilliance of Keynes' Clearing Union is that, by charging interest on both positive and negative balances, an automatic negative feedback loop is introduced that moderates imbalances in national accounts regardless of the direction of the imbalance.

I see! Instead of merely accumulating reserves to pay for a crash, the tax on positive or negative trade balances works to discipline the international market so that the likelihood of a crash is diminished, and, should that discipline fail, to raise money in some reasonable proportion to the accumulated risk. Brilliant indeed.

The one risk that it can't control is that of deregulation ideologues successfully lobbying for a reduction of the tax rate or a pay out of the reserves on the grounds that they are a drag on the economy. Had we been able to resist that kind of deregulatory pressure we would likely not be here today for reasons other than a Keynes Clearing Union, but such an arrangement cannot hurt the stability of world trade. The transition to such a Union today would be interesting, to say the least.

When Keynes began to explain his idea, in papers published in 1942 and 1943, it detonated in the minds of all who read it. The British economist Lionel Robbins reported that "it would be difficult to exaggerate the electrifying effect on thought throughout the whole relevant apparatus of government ... nothing so imaginative and so ambitious had ever been discussed"(5). Economists all over the world saw that Keynes had cracked it. As the Allies prepared for the Bretton Woods conference, Britain adopted Keynes's solution as its official negotiating position.

But there was one country - at the time the world's biggest creditor - in which his proposal was less welcome. The head of the US delegation at Bretton Woods, Harry Dexter White, responded to Lord Keynes's idea thus: "We have been perfectly adamant on that point. We have taken the position of absolutely no"(6). Instead he proposed an International Stabilisation Fund, which would place the entire burden of maintaining the balance of trade on the deficit nations. It would place no limits on the surplus that successful exporters could accumulate. He also suggested an International Bank for Reconstruction and Development, which would provide capital for economic reconstruction after the war. White, backed by the financial clout of the US Treasury, prevailed. The International Stabilisation Fund became the International Monetary Fund. The International Bank for Reconstruction and Development remains the principal lending arm of the World Bank.

The consequences, especially for the poorest indebted countries, have been catastrophic. Acting on behalf of the rich world, imposing conditions which no free country would tolerate, the IMF has bled them dry. As Joseph Stiglitz has shown, the Fund compounds existing economic crises and creates crises where none existed before. It has destabilised exchange rates, exacerbated balance of payments problems, forced countries into debt and recession, wrecked public services and destroyed the jobs and incomes of tens of millions of people(7).

That was when the US had 50% of world GDP and was a creditor nation. Maybe now that the US is drowning in its own excrementdebt they might be persuaded to implement something akin to Keynes' ideas. But would China (the new economic giant and creditor nation) and Wall Street (the US' creditor-within) allow it?

Where the two founding fathers differed most was on the third theme: how independent and how powerful should the IMF be? To Keynes, what the world needed was an independent countervailing balance to American economic power, a world central bank that could regulate the flow of credit both in the aggregate and in its distribution. To White, what was needed was an adjunct to American economic power, an agency that could promote the balanced growth of international trade in a way that preserved the central role of the U.S. dollar in international finance.

Because White prevailed in that argument, and the IMF became a dollar-based institution, the Bretton Woods system contained a fatal flaw. For international reserves to keep pace with the growth in world trade required an ever-expanding supply of dollars, which as the economist Robert Triffin observed in the late 1950s was incompatible with the preservation of a stable value for the dollar.

Because White prevailed in that argument, and the IMF became a dollar-based institution, the Bretton Woods system contained a fatal flaw. For international reserves to keep pace with the growth in world trade required an ever-expanding supply of dollars, which as the economist Robert Triffin observed in the late 1950s was incompatible with the preservation of a stable value for the dollar.

Even in the eyes of US financial and economic elites at that time, with the Depression still a clear and vivid personal and professional memory, a stable dollar came a distant second to the opportunity for more rapid enrichment for them and their class. What did dollar stability matter if stability itself would be defined in terms of the dollar? Clearly, it was other peoples' problem.